T 2

Question 1

primary market

Answer 1

Firm wants to raise capital
Create new securities and sell them
The firm receives proceeds from the sale

Question 2

secondary market

Answer 2

Current owner sells to another party (i.e. re-trade of current securities)
No new capital is raised for the firm
No change in the number of securities

Question 3

Public Offerings:

Answer 3

Initial Public Offerings (IPO): First sale of stock by a formerly private company (IPO is usually considered underpriced )
Seasoned equity Offerings (SEO): Offered by companies which already have stock trading in the market.

Question 4

Private Placement

Answer 4

Sold directly to a small group of investors
Not registered with SEC
Restriction of resale in the secondary market

Question 5

IPO investment bank ( firm commitment )

Answer 5

In firm commitment, the underwriter buys all the securities and resell to the public.
The underwriter bears the inventory risk.
The underwriter’s profit is based on how many shares it sells

Question 6

IPO investment bank best offer

Answer 6

In best-effort, an underwriter commits to make their best effort to sell as much as possible of a securities offering.
no guarantee of raising a specified amount of money
limits underwriters profit

Question 7

types of secondary markets

Answer 7

Direct Search Markets
Brokered Markets
Dealer Markets
Auction Markets

Question 8

direct search market

Answer 8

Buyers and sellers locate one another on their own

Question 9

brokered markets

Answer 9

Third-party assistance in locating buyers or sellers (

Question 10

dealer markets

Answer 10

Third-party acts as an intermediate buyer/seller and profits from the bid-ask spread.
Most bonds and foreign exchanges; NASDAQ

Question 11

trading mechanics

Answer 11

types of orders :
market order
price contingent order : ( limit order/stop order)

Question 12

market order

Answer 12

Buy or sell order at the best price currently available.
complications:
1. Large market orders can be executed at multiple prices
2.The order may be executed at a different price from the one at the moment of the order

Question 13

limit buy order

Answer 13

limit buy order buy if price less or equal to stipulated price
execute at a particular price or lower

Question 14

limit sell order

Answer 14

can be executed at limit price or higher

Question 15

stop loss order

Answer 15

order at $40. If the trades take place at $40 or less, the order is activated and the order become a market sell order.

Question 16

stop buy order

Answer 16

order at $50 becomes a market buy order if trades takes place at $50 or above

Question 17

brokers options to execute order

Answer 17

internalization
third market maker
electronic communication exchange 
centralized exchange ( dealers market, auction market, regional market)

Question 18

electronic communication networks

Answer 18

Computer networks that allow direct trading
without relying on market makers
Limit order book available to all participants

Question 19

NYSE commission brokers

Answer 19

Take orders placed by the public at the brokerage firm and execute them on the exchange

Question 20

NYSE floor broker

Answer 20

: Aid commission brokers when the order flows becomes too large for a commission broker to handle

Question 21

NYSE spesialist

Answer 21

Market maker in NYSE that specializes in facilitating trades of specific stocks and maintains “fair and orderly market”
Each stock is assigned to one specialist. A specialist makes market for many firms
Maintains the limit order book and act as auctioneer to show brokers best bids and offers
Keep and inventory of stocks and buy/sell if there is an supply-demand imbalance
Largely replaced by ECNs

Question 22

NASDAQ

Answer 22

No specialist; multiple market makers communicate with buyers and sellers
Three level of members
LEVEL 3:Registered market makers
Set bid and ask quotes and stand ready to or sell
LEVEL 2:Brokers
Receive bid and ask quotes, but cannot enter quotes
LEVEL 1:Investors
Receive only inside quotes, but not quantity offered. Not actively buying/selling but need information on prices.

Question 23

Trading Cost Components

EXPLICIT COSTS

Answer 23

Direct costs if trading that are associated with visible accounting charges
Commissions paid to brokers, fees paid to exchanges, taxes paid to governments.
Any other resources devoted to the trading process.

Question 24

Trading Cost Components

IMPLICIT COSTS

Answer 24

Bid-ask spreads
Price Impact
Missed trade opportunity costs

Question 25

buying on a margin

Answer 25

Purchasing securities (in part) by borrowing money is called buying on margin.
Margin is the portion put up by an investor to secure credit from a broker to buy securities. In other words, it refers to the part not borrowed. The remainder is borrowed from the broker.

Question 26

short sale mechanics

Answer 26

Taking a long position with or without margin : Buy low now, sell high later
Short selling: Sell high NOW, buy low LATER
Short sales allow investors to profit from a decline in security’s price by selling a security that is borrowed from another investor

Question 27

show selling pros and cons

Answer 27

Pros:
 Possibility of high profits
Little initial capital required
Hedge against other holdings
Cons:
Potentially unlimited loses
Margin account necessary and interest incurred
Short squeeze